TCAP: Expensive Subsidies Will Increase Power Prices

In a recent guest editorial that appeared in the Houston Chronicle, Dr. Randy Moravec, executive director of the Texas Coalition for Affordable Power, warned that proposed subsidies for big power plants could lead to painful price increases for Texas electricity consumers. Just below is the text of his guest editorial.

Perils of this electricity plan

Grocers make money selling groceries. Bakers make money selling bread. But big electric companies want to make money simply for existing. And if they get their way, electricity costs to Texas residents and businesses would increase; maybe by a lot.

Dr. Randy Moravec, TCAP Executive Director

Under proposals now before the Public Utility Commission of Texas, owners of power plants would receive subsidies based on the number and size of plants they own. The more they own, they more they receive. The subsidies would be added to wholesale power costs, but they’d trickle down into home energy bills.These subsidies, known as “capacity payments,” are wrong for Texas. The PUC is expected to take up the issue during a hearing on Oct. 8th. We urge commissioners to reject these subsidies and stick with our current competitive market in which power plants generally receive payments only for the power they generate.

Make no mistake — these contemplated changes are not trivial. Under some estimates, capacity payments in Texas could total more than $4 billion annually. The creation of a system to deliver them would mark the biggest change to the electric market since deregulation 11 years ago. Such a system would increase power prices, lead to more regulation and mark a step away from the free market principles under which electric competition was premised.

How would this capacity payment system work? If some generators had their way, wholesale electricity buyers would be required to participate in periodic auctions — set up by regulators — which would raise extra money for power plant owners. Ostensibly, the wholesale electricity buyers would be bidding on generation capacity and the money raised would promote new generation investment.

But generation owners offer no guarantees that they’ll build anything. Other states that have set up capacity payment systems have found them to be complicated, subject to litigation, and fraught with controversy. Most of the money doesn’t end up supporting new generation investment but rather the profits of generation companies.

To justify capacity subsidies, Texas power companies raise the specter of 2011, a particularly difficult year for the state’s power grid. But the winter blackouts that year were not related to inadequate generation reserves, and no outages occurred that summer despite a record heat wave. Generation companies also trot out official projections showing generation reserves dropping below safe levels in the future. But history has revealed these official projections to be consistently wrong. Generation reserves have never dropped below safe levels for any prolonged period in Texas, and new generation is coming online all the time.

Some observers have noted that in competitive markets for other products, sellers receive payment only for what they produce. Requiring artificial subsidies as a necessary condition for operating a competitive electricity market would amount to a very expensive admission that when it comes to electricity, competitive markets don’t work. But we believe it’s too soon to give up on the market. Retail electric providers are just now coming up with new products that can limit peak period consumption, addressing power reserve concerns without having to build any additional power plants. For the sake of consumers, the market should be given time to evolve and improve. We urge the PUC to give competition a chance and reject capacity subsidies.

TCAP is a coalition of more than 160 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.

R.A. "Jake" Dyer

Is a policy analyst for TCAP, a coalition of cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.

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